The launch of the euro has been presented as a new era for Europe ; or in the words of the finance minister of Portugal, the euro is here to stay, it is now impossible to turn back.
An enormous propaganda, publicity campaign and euro-phoria preceded the introduction of the euro. A picture was created of Europe entering an era of growth and stability, thanks to the euro. But this picture is a forgery, the euro is in fact adding to the world’s economic instability and imbalances.
Ten days after the introduction of the euro the Financial Times 13 January 1999 carried an article warning about Short-lived europhoria, and stock markets plunged after the Brazilian currency (Real) went through the floor. At the same time Morgan Stanley published a report declaring that an economic slowdown is taking root across Europe. The crisis in Brazil, the weakness of the dollar and the slow down in Europe’s manufacturing have sent home the message that world capitalism and the euro is heading for dangerous water. When the recessions bites in Europe there will be a crisis for the euro. The austerity measures stipulated by the misnamed.Stability and Growth Pact, which has overtaken the role played by the Maastricht criteria, will aggravate the downturn in Europe and provoke mass anger against the euro-governments.
The recent propaganda offensive by the ruling classes and their political spokespersons in Europe together with the superlatives about the ultimate success of the euro need to be answered by the CWI, particularly its sections in Europe. The struggle against the euro/EMU needs to be put on the top of the agenda in the coming euro-election campaign. This is because the governments and the bosses will be compelled to step up their attacks against workers’ rights and social welfare in the wake of the euro. The euro will especially be used as a weapon to further de-regulate the labour market, making all jobs more insecure, forcing wages down and worsening workers rights, which in turn will give way for a strong popular mood against the euro/EMU and its deflationary policy.
The launch in itself will not alter our general fundamental position, i.e. that the euro or the EMU is unworkable, given the contradictory interests between the different national states in Europe. Even if the euro runs smoothly for many months that does not ensure its survival. In our view, the present euro-phoria could soon turn into the same mood of ’euro-gloom’ as in the last crisis of 1991-94, when six million jobs were lost in the EU and the euro’s fore-runner, the European Exchange Rate Mechanism (ERM) was ship-wrecked in 1992.
The euro-triumphalism will be shattered by the approaching economic downturn. It was only possible for eleven EU countries to introduce the euro because the world downturn has not yet hit Europe and the US with full force. In a contradictory way, the flight of capital from Asia, Latin America and other so-called emerging markets prolonged the share bubble on the stock exchanges of the advanced capitalist world, disguising the recession that have already begun in the US and Europe.
From euro-phoria to euro-gloom and euro-sclerosis
That launch of the euro, as a common currency used in trade, in finance, savings and accounting is now a fact. According to the timetable, national currencies will be taken out of circulation in the first half of the year 2002. Up to then the euro will be a parallel currency within the countries but will act as a single currency in all international transactions. The euro-zone is the second biggest capitalist bloc in the world and the zone’s government debt market is the world=92s biggest. It is likely that the euro will become a ’strong currency’ in the coming months as the value of US dollar continues to fall. But the question is not so much how strong the new currency will be or to what degree the euro will challenge the dollar as a world reserve currency, but more, in the words of Nobel-prize winning economist Franco Modigliani, "Its ability to cure the plague of unemployment, currently 10 per cent and higher in member countries."
The introduction of the euro, take place when: "The world economy faces a tumultuous year in 1999, which threatens to eclipse any of the difficulties experienced during the past 12 months. The fundamental imbalance between consuming power and excessive supply which has led to sustained downward pressure on prices and, in turn, on profits has show few signs of abating during the final months of 1998. Continental Europe’s failure to address its supply-side deficiencies (over-production, over-capacity and the lack of demand) has left it hopelessly exposed to the ravages of falling prices, which threaten to push unemployment up to politically difficult levels over the next two years." Graham Turner, economist with Tokai Bank, quoted in the British Guardian, 11 January 1999.
Adding to the present instability
Europe is moving into recession this year. German capitalism – the anchor in the euro zone – will only experience a miserable 1.4 per cent growth this year and the Lombard Street Research is forecasting a growth rate in the euro zone of just 1.25 per cent in 1999. Such a slow rate of growth will result in higher unemployment and reduce state income. Even the IMF has pointed to the obvious political outcome of more lay offs, and further cut backs in public spending; "Many may question whether the EMU was worth the effort, if isn’t a vehicle for new jobs" And the euro is certainly not a vehicle for more jobs. EMU should rather be read as Even More Unemployment.
Moreover, the launch of the euro also coincides with a political rift between the European parliament and the leading executive body in the EU, the Commission, which is accused of fraud, corruption and incompetence. On top of that, both Germany and Netherlands are demanding a cut in their net contribution to the EU funds. The richer countries do not want to any longer subsidise the weaker ones, whatever has been said about the need for ’co-operation’ and ’transparency’. The splits amongst the EU countries on how to proceed with the so called ’enlargement process’ to Eastern and Central Europe, seem to become wider each day. Everyone is in favour of enlargement, but no one wants to pay for it. In addition to that, the explosive situation in Kosova could turn into a new crisis in the EU and aggravate divisions between the EU and the US. The euro is not exactly surrounded by political stability and ’strong European leadership’, whatever that is. The EU-countries are divided on most of the main issues apart from euro/EMU.
However, will this newly formed holy alliance in support of the euro hold together when conditions diverge in the euro-zone, both in political and economic terms? It will, in our view, be impossible to maintain a ’one-size-fit-all’ monetary policy when the conditions become more and more intolerable and when countries are forced to find their own ways of adjusting to the crisis.
The introduction of the euro will speed up the process developing towards a slump in Europe, which means that the euro will soon face the ’moment of truth’. As was already pointed out by the British newspaper The Independent in September 1998: " an ideal world Europe would either have got the euro up and running during the present expansion, or postponed it until we were through to the next one. As it is, it will be brought in at the worst possible time."
However, the political elite in Europe, supported by big sections of the capitalist class, saw no other way than to go ahead with the euro – a perfect illustration of what Trotsky describes as ’the bourgeoisie tobogganing towards a catastrophe with closed eyes.’ Nevertheless, at this stage, the capitalist classes regard the euro as a vehicle that can both strengthen their position against the working class and in relation to their rivals in the US, Japan and other Asian countries.
The launch of the euro will affect, both in political and economic terms, not only the euro zone, but also the US, Japan and other countries as well. It is not an accident that governments in Greece, Sweden, Denmark and Britain (who are not part of the EMU) are using the opportunity given to step up their effort to win popular support for joining the euro/EMU as soon as possible.
A capitalist project
The EMU should be regarded as a capitalist project, a desperate move to try to overcome the present epoch of depression and the decline of European capitalism. The alternative to the bosses’ EU and the EMU-project is the struggle for a socialist Europe, for a workers’ Europe.
The launch of the euro has reinforced the need for an all-European struggle against cuts, low wages and so-called labour flexibility and in favour of an immediate reduction in working hours throughout Europe on conditions set by the workers, for a living wage, a plan for millions of new jobs, public investments in infrastructure, education and housing. Our struggle for jobs and welfare is also a struggle for class unity and internationalism – against racism, the scrapping of the right of asylum and nationalism. A socialist plan of production, democratically run by the working people will make it possible use all the resources, and to redistribute the wealth that is now controlled by a handful of capitalist and the super-rich. The major companies, the big monopolies that run the economy, have to be taken into public ownership.
Prospects for the euro/EMU and its viability, together with the likelihood of a launch according to the timetable stipulated by the 1992 Maastricht treaty, have been under discussion for some time inside our own ranks. It was one of the main issues of debate at our very successful World Congress last year. The question whether it will start or not, has been answered by events and the introduction of the euro on 1 January 1999. However, whether or not the EMU could start according to the timetable was a secondary question. The burning issues are: what will be the political, economic and social implications of the launch and will the euro establish itself as single currency in a single European market?
Common currencies, fixed exchange rates or monetary unions have existed before the euro, but not one has lasted. The US dollar was the main international currency during the post-war upswing, but the break-down of the Bretton Woods agreement and the devaluation of the dollar in the early 1970s marked the end of the US dollar=92s supreme dominance, although the US dollar is still used in 48 per cent of international trade transactions and is still the main reserve currency in the world.
Not one has lasted
Before the First World War and in the inter-war period, the Gold Standard fixed the value of national currencies against gold. However, the Gold Standard collapsed in 1931 and the 1930s became a period of competitive devaluation and protectionism.
In 1992 the ERM collapsed and gave way for competitive devaluations. Devaluations are protectionism through the back door. In all countries that either devalued or withdrew from the ERM, exports surged while inflation remained subdued. The experience of the aftermath of the end of the ERM, and devaluations in a deflationary spiral, could be described as: ’The boundaries of an era. Between 1967 and 1992, the susceptibility of inflation to upward shocks meant that currency depreciation appeared to be of little use. Now that inflation is tame, however, changing the exchange rate is again a viable tool of economic management.’ (From the book ’The death of inflation’ by Roger Bootle). Devaluation today, in a deflationary spiral, is a more effective instrument in boosting export than before, when inflation rapidly undermined any depreciation of the currency.
The history of capitalism shows that monetary unions or a fixed exchange rate, against gold, the British pound, the US dollar or, in the case of the euro against the D-mark, can only be sustained and provide financial stability in a period of upswings, not in an epoch of depression, which expresses itself in slower growth rates, modest growth in productivity, a widening gap between rich and poor, and, particularly in Europe, structural mass unemployment.
Nevertheless, the fate of the euro will decided by its ability to stimulate growth and trade and to create jobs. While the new so-called centre-left governments in Europe are talking about the need for creating more jobs and to stimulate demands, the straitjacket of the euro and the ’Stability Pact’ is demanding the opposite. This contradictory situation cannot be sustained indefinitely. On top of that, if countries are neither able to manipulate their currencies (devalue or let the currency float) or inject a dose of inflation (to reduce the mountain of debts) as response to the crisis, then there is now no other way to reduce costs than to make draconian cuts in wages and social spending. Instead of stimulating demand, the latter measures will strangle the already fragile economies and provoke massive political and social unrest.
It does not need a political genius to realise that a government faced with further social deprivation and political crisis will start to blame the euro and the European Central Bank (ECB) for the problems. The ECB is obsessed with fighting inflation and wants to step into the shoes of the neo-liberals and the German Bundesbank as the main champion in Europe for sound monetary and fiscal policy with labour flexibility. As Robert Reich, the former US Labor Secretary, pointed out: ’Sound monetary policy means that the European Central Bank freed from democratic oversight, will fight inflation, not unemployment’
The ECB, a’central bank’ that is accountable to no one and is strictly forbidden to play the normal role of a national central bank as the lender of last resort, is a perfect scapegoat. Though the politicians will most likely try to hide behind the euro, the ’Stability Pact’and the ECB, at the beginning no one will want to be blamed for wrecking the project. In the end they will have to take unilateral measures in order to try and protect their own national interest and skins. This process towards opting out of the euro will be a process including several political crises fuelled by militant strikes, movements from youth and workers on a bigger scale than France 1995, the election of new governments, etc. Last year’s strikes and protest in France and, for example, the present magnificent student movement in Greece are indications of what kind of struggle lie ahead. The decision to leave the euro will be taken reluctantly and as a last resort. Nevertheless, despite the loss of prestige and credibility in the eyes of other euro-members, faced with a situation when a rapid increase in unemployment is running the risk of tearing society apart, the bourgeoisie will have no other choice than to seek protection using its own state apparatus. The defection of one or two major economies, especially France, could wreck the euro. What could be left of the euro, after such political and social turbulence in many of the European countries, is a ’lesser EMU’, a Deutschmark-zone involving those countries that have the closest economic ties to Germany.
The euro will be particularly volatile in a crisis
Countries are not hit by crisis in the same way, speed or depth. The convergence in the euro-zone is merely artificial. Italy is probably the weakest link in the present euro-chain, and no chain is stronger than its weakest link. Italy’s growth rate was the was the weakest in the EU last year (1.5 per cent) and the country is already out of step with other euro-members. Official figures put unemployment at 12.5 per cent (6% in the north and 22.3% in the south of the country). A strong euro will rub salt into the wounds of Italian capitalism. As was mentioned in the Financial Times Survey on European Economy, 30 October 1998: ’The Asian and Russian market crises have had a big impact on trade. Italy is a particularly big exporter of textiles to these markets and has been badly affected by currency devaluations.’ In other words, the last thing Italy needs is a stronger currency that is pricing out its exports even further. Inside the euro-zone there is, on the one hand, Italy which is close to recession and, on the other hand, southern Ireland that is booming and is close to becoming a bubble economy. It is obvious that one EMU-policy cannot be effective for any length of time for both countries, but that is now what is happening. Bourgeois economist that issue warning that an ’asymmetric shock’ (a serious distortion in a particular country, region or industrial sector in a given economic area) could seriously derail the euro or the EMU-project are more to the point.
Unlike the US, the euro-zone is not a federal state where money and subsidises can be transferred to weaker areas that are de-coupling from the prevailing economic cycle. The EU budget is only 1.27 per cent of the members combined GDP, but subsidises and transfers accounts for 13 percent of GDP in the US. Culture, language and higher unemployment also restrict labour mobility in the euro-zone.
Leave aside the fact that the ECB is strictly forbidden to bail out countries, there are no funds available that can ease the pain of such a shock. ’The new euro zone’s governments have deprived themselves of the shock absorbers traditionally used to realign economies. Devaluations will no longer be an option: nor will lower interest rates. The only shock absorber left are the voters, who will pay the price of divergent economic performance by losing their jobs…The first downturn in Euroland will ensure the swift demonisation of the ECB in France and elsewhere, whatever the merits of its decision… Political problems could then multiply.’, wrote The European, 27 April-3 May 1998. The contradiction inherent in the euro/EMU, is that countries are not allowed to act independently to the crisis, yet the euro/EMU provides no real instrument to absorb inevitable national shocks.
Again and again the euro will come up against the limitation set by the national state, which is after all a basic unit of capitalism. Capitalism is still rooted in the nation state, which is not an economic category but a social formation, that includes historical elements such as territorial property, a common language, culture, etc. Each different national bourgeoisie still depends on the various forms of subsidises and protection provided by its state apparatus and government. This is still the case, despite globalisation and the high level of integration inside the EU. The barriers put up by the national state cannot simple be overcome by economic changes. It is a social question. That is why the euro will not in the end lead to a single market in a united Europe on the basis of capitalism. However, that some countries will be forced to opt out from the euro/EMU will not mark the end of the EU. Competition from the US and Japan will still compel the ruling classes in Europe to act as bloc against other trade blocs.
No one can predict how long the euro is going to last, but the present trends in the world economy are working against the euro, despite all the superficial success stories about the new currency.
The ’smooth’ launch of the euro, together with the seasonal influx of ’fresh’ money into the stock markets, undoubtedly boosted the price of shares. But this will not be sustainable. The stock markets are bound to come down in the course of 1999. The US can no longer act as a buyer of last resort. The present sign of a slow down in the US, combine with soaring US current account deficits and the loss of markets in Latin America, are weakening the value of the dollar.
A bubble that will burst
It is striking that the Japanese yen strengthen sharply against the US dollar – reaching a 28 month high of Y109 to the dollar, which in turn forced the Bank of Japan to intervene in order to halt the appreciation of the yen against the dollar. The weakness of the dollar is a clear sign of a slow down in the US; that speculators have started to realise that the bubble in the US cannot last and the depth of the crisis in Latin America (20 per cent of US export is directed to Latin America). Moreover, Japanese capitalists have become more and more reluctant to put more money into US assets because of crisis they are facing at home. Japan is in a slump, unemployment has reached 4.4 per cent, and the country has entered a deflationary spiral of falling prices, wages and profits.
At the same time as the US current account deficit is heading towards a record $300 billion this year. As a proportion of GDP it as high as in the 1987, when the dollar went into free-fall. This is causing financial instability, and ’trade tensions between the US and Japan are increasing quite dramatically’, according to US trade representative Charlene Barshefsky.
The launch of the euro means investors will start to place money in euro-funds and this could speed the slide in the dollar against the euro and the yen.
As the CWI has pointed to many times, the fall in the value of the dollar has always been followed by an increase in the value of the D-mark or in this case the euro. A weak dollar means a ’strong’ euro, and a ’ strong euro will add to Europe’s developing exports crisis. ’But, while the euro’s strength may stoke European pride, it also could pose a challenge by threatening to make the bloc’s exports less competitive and by further slowing an already weakening economy .’ The US International Herald Tribune 5 January 1999.
The euro represents a vital part of the bosses=92 and the governments’ strategy to reshape capitalism in Europe and make the continent work again. But the launch is the beginning of the end for the euro and the its first victim will be the present euro-phoria.
However, the task for the Marxist is now to explain the reasons for the euro, its limitations and possibilities and how will affect the struggles of the working class. But above all, we should use the opportunity to step up the fight aginst the bosses’ euro/EMU.
The CWI fights for:
- No to the bosses’ euro/EMU.
- For a democratic and fighting trade union movement that is able to unite the workers in Europe in a common struggle against the bosses and the government.
- A united struggle of the working class people in Europe against cuts in welfare, privatisations, de-regulations, job closures and racism.
- Jobs for all, a living wage, a shorter working week without loss of pay, and earlier retirement.
- A massive public spending increase in education, health, housing and transport.
- Away with the insecurity and chaos of the market.
- Democratically plan the economy for the needs off working people by taking the monopolies into public ownership.
- For a voluntary, democratic Socialist Federation of Europe.
- Full support to the all-European demonstration against cuts, unemployment and poverty, in Cologne in Spring.
- Join the CWI. Be active in the struggle for international socialism, and a new workers’ International.